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Well do you expect the US to keep running trade deficits of 2.8% of GDP every year? In 1980 the foreign sector owned 10% of US assets. In 2020 it's 40%. Now th

by rsj_hn 5y ago

Well do you expect the US to keep running trade deficits of 2.8% of GDP every year? In 1980 the foreign sector owned 10% of US assets. In 2020 it's 40%. Now that's not going to continue forever, because at some point the military wont even be able to make planes anymore, and the US government wont allow foreign ownership of Intel, SpaceX, Boeing, etc. Sure, we'll sell off McDonalds and Costco, but not Amazon or Google. Maybe we can reach 70% of our capital stock under foreign control after another 40 years, but not much more than that, so this party has a life expectancy of less than 40 years. I don't care how irreplacable those Chinese workers are, they aren't going to work for free, so we will either need to produce more domestically or just do without, no matter how dependent we are on it, and no matter how unimaginable it is to live within our means. At the same time, we are getting more and more domestic unrest as a result of the collapse of productivity as we outsource our increasing returns industries. No productivity, foreign devaluation, supply disruptions -- that's a recipe for some serious social unrest, which will only increase once the supply of consumption drops from China comes to a halt. So regardless of how unthinkable the alternative appears to be, the deficits will stop in the worst case with a currency crisis in the future. Many nations have gone through that, and it's terrible, it can even cause starvation, but it's not unheard of. Even if we do nothing about it, it will right itself, just through the dollar falling by a factor of whatever is required to bring the trade deficit into balance. At some nonzero factor that will happen. If it takes 100 dollars to buy 1 RMB, then we wont have a trade deficit with China, even if this means lots of industries become bankrupt. And if that's what it takes, then to bankruptcy they will go. If that means there are millions of people wandering the streets without jobs, and shortages of clothes, computers, concrete, and even basic machinary, well that's what it's going to be. Reality doesn't stop just because something becomes unthinkable. When Russia had its currency crisis, the life expectancy fell, inflation reached 84%, there were food shortages, and GDP contracted by half. We are not immune. Bottom line, when you outsource your more productive industries, the standard of living has to decline. You can delay that decline for a while, but then the bill comes due and living standards drop. Your point, that we can't produce all these goods domestically, is just another way of saying we are living above our means. That will stop. And if you think it's painful to stop the trade deficits today, imagine how much more painful it will be in 40 years when even more production has been outsourced, and we are able to produce even less domestically. Then a collapse of the dollar will be much worse than tightening our belt today and doing without. But the deficits will stop, it's only a question of how much longer we keep delaying it. Of course Trump didn't have the political will, or the mandate from our ruling class, to put an end to the party. But at some point we will have a President who will put an end to the party or the currency markets will do that for us.

simonh 5y ago
It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line. That's globalisation working in both directions. Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets. What's actually happening is the opposite of the currency crisis you fear. The USA today is not even remotely comparable to Russia in the 90s. That's completely absurd. The US is attracting so much foreign investment precisely because it's economy is in a very strong position. How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US? Meanwhile US companies and investors are investing heavily abroad. That's not weakness, it's integration.
- rsj_hn 5y ago
  > It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line. Foreign holdings of US Assets, as of Q2 2021 are 43592.2 Billion[1] US holdings of foreign assets are: 7694.6 Billion.[1] We owe the world 43.6 Trillion, and they owe us 7.7 Trillion. That's a net debt of 35.9 trillion. > Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets. If by "right now", you mean we reached that 36 Trillion of net debt through steady growth since the 1970s, then I agree with you - assuming "right now" refers to a 50 year period of systemic and growing trade deficits. > but that's due entirely to the strength of the US dollar inflating the value of US assets. No, it's due to the rest of the world desiring to run trade surpluses against the U.S. in order to support an export led growth policy. All of East Asia has industrialized on the back of running large export surpluses to the U.S. That's a strategic policy decision to drive the growth of manufacturing, and it is implemented by purchasing dollar denominated assets. One side effect of these purchases is an overly strong dollar (as well as excessively low interest rates) but then that's what we had for most of the last 50 years. It's not like the dollar is too strong as a result of some accident of the weather, and then this causes a trade deficit just out of nowhere. Golly, how did that happen? > What's actually happening is the opposite of the currency crisis you fear. I am not saying we are in a crisis right now. The reason why a crisis happens is because the currency becomes overvalued! That's where we are right now. The crisis is the future downward adjusment from the present overvalued state. As the currency becomes overvalued over a long period of time, the nation begins to deindustrialize (due to importing too much) and suffers from asset bubbles (due to artificially low interest rates). Then there is a crisis and the currency adjusts rapidly downward. The bigger the overvaluation, the bigger the fall. You usually get an overcorrection as the current account swings into surplus. > How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US? Because they are the same damn thing. For the US to run a trade deficit with the rest of the world, we have to be buying their goods and they have to be re-investing the proceeds back into buying US assets. That's the only possible way you can have a trade deficit! Look, the rest of the world sells us an apple for 1 dollar. Now, what does the world do with the dollar? We don't live in an age of specie flows, so they can't spend that money at home. It's fiat, and must be spent in the U.S. Option A) It buys something from the US -- a peach. Trade is balanced. Option B) It invests the money in the US -- it buys a bond, or a share of stock. Trade is not balanced. But those are the only two options. So saying the rest of the world is a net purchaser of US financial assets is exactly the same thing as the rest of the world is a net exporter to the US of their goods. > The US is attracting so much foreign investment precisely because it's economy is in a very strong position. No, the US is not "attracting" foreign investment, the US is selling off its assets to the rest of the world in exchange for higher present consumption. > Meanwhile US companies and investors are investing heavily abroad. No they are not. They own a total of 7.7 Trillion of foreign assets, whereas the rest of the world owns 43.6 Trillion of US assets. > That's not weakness, it's integration. OK. Can I integrate with your balance sheet along the same terms? I'll end up with $44,000 of your assets, and you'll end up with $6,700 of my assets. It's equal! We will dance in mutual friendship. > The USA today is not even remotely comparable to Russia in the 90s. You'd be surprised to learn that as far as international trade goes, our biggest exports are commodities. No, we are not Russia, of course, but then concerns about the U.S. currency are much bigger than in Russia -- I was using Russia as an example of the pain of currency adjustment. I was not saying that we were Russia. [1] https://www.federalreserve.gov/apps/fof/guide/l133.pdf https://www.federalreserve.gov/apps/fof/guide/l133.pdf

by rsj_hn 5y ago

simonh 5y ago

It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line. That's globalisation working in both directions. Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets. What's actually happening is the opposite of the currency crisis you fear. The USA today is not even remotely comparable to Russia in the 90s. That's completely absurd. The US is attracting so much foreign investment precisely because it's economy is in a very strong position. How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US? Meanwhile US companies and investors are investing heavily abroad. That's not weakness, it's integration.

rsj_hn 5y ago
> It's true foreign ownership of US stock has risen, but US ownership of foreign assets has also risen roughly in line. Foreign holdings of US Assets, as of Q2 2021 are 43592.2 Billion[1] US holdings of foreign assets are: 7694.6 Billion.[1] We owe the world 43.6 Trillion, and they owe us 7.7 Trillion. That's a net debt of 35.9 trillion. > Right now there is an imbalance, but that's due entirely to the strength of the US dollar inflating the value of US assets. If by "right now", you mean we reached that 36 Trillion of net debt through steady growth since the 1970s, then I agree with you - assuming "right now" refers to a 50 year period of systemic and growing trade deficits. > but that's due entirely to the strength of the US dollar inflating the value of US assets. No, it's due to the rest of the world desiring to run trade surpluses against the U.S. in order to support an export led growth policy. All of East Asia has industrialized on the back of running large export surpluses to the U.S. That's a strategic policy decision to drive the growth of manufacturing, and it is implemented by purchasing dollar denominated assets. One side effect of these purchases is an overly strong dollar (as well as excessively low interest rates) but then that's what we had for most of the last 50 years. It's not like the dollar is too strong as a result of some accident of the weather, and then this causes a trade deficit just out of nowhere. Golly, how did that happen? > What's actually happening is the opposite of the currency crisis you fear. I am not saying we are in a crisis right now. The reason why a crisis happens is because the currency becomes overvalued! That's where we are right now. The crisis is the future downward adjusment from the present overvalued state. As the currency becomes overvalued over a long period of time, the nation begins to deindustrialize (due to importing too much) and suffers from asset bubbles (due to artificially low interest rates). Then there is a crisis and the currency adjusts rapidly downward. The bigger the overvaluation, the bigger the fall. You usually get an overcorrection as the current account swings into surplus. > How can consumers buying Chinese goods be a sign of strength in China, but investors buying into US companies be a sign of weakness in the US? Because they are the same damn thing. For the US to run a trade deficit with the rest of the world, we have to be buying their goods and they have to be re-investing the proceeds back into buying US assets. That's the only possible way you can have a trade deficit! Look, the rest of the world sells us an apple for 1 dollar. Now, what does the world do with the dollar? We don't live in an age of specie flows, so they can't spend that money at home. It's fiat, and must be spent in the U.S. Option A) It buys something from the US -- a peach. Trade is balanced. Option B) It invests the money in the US -- it buys a bond, or a share of stock. Trade is not balanced. But those are the only two options. So saying the rest of the world is a net purchaser of US financial assets is exactly the same thing as the rest of the world is a net exporter to the US of their goods. > The US is attracting so much foreign investment precisely because it's economy is in a very strong position. No, the US is not "attracting" foreign investment, the US is selling off its assets to the rest of the world in exchange for higher present consumption. > Meanwhile US companies and investors are investing heavily abroad. No they are not. They own a total of 7.7 Trillion of foreign assets, whereas the rest of the world owns 43.6 Trillion of US assets. > That's not weakness, it's integration. OK. Can I integrate with your balance sheet along the same terms? I'll end up with $44,000 of your assets, and you'll end up with $6,700 of my assets. It's equal! We will dance in mutual friendship. > The USA today is not even remotely comparable to Russia in the 90s. You'd be surprised to learn that as far as international trade goes, our biggest exports are commodities. No, we are not Russia, of course, but then concerns about the U.S. currency are much bigger than in Russia -- I was using Russia as an example of the pain of currency adjustment. I was not saying that we were Russia. [1] https://www.federalreserve.gov/apps/fof/guide/l133.pdf https://www.federalreserve.gov/apps/fof/guide/l133.pdf